Clinton Has a Golden Opportunity to Push His Urban-Investment Agenda

In Washington, obscurity is never a measure of insignificance. Usually the opposite is true: The most important things are often the most arcane. (When House Speaker Newt Gingrich’s defenders insisted that he violated only an “arcane” corner of the tax law, they forgot this fundamental rule.)

The front pages are filled with the heat and light of choreographed political conflict; but decisions that affect millions are often recorded only deep in the clotted gray swamp of the Federal Register.

That’s certainly been the case for the Clinton administration’s urban agenda. In the past four years, President Clinton’s most important efforts for the cities have involved obscure actions that attracted almost no media attention: invigoration of the law requiring banks to provide credit to low-income communities, tougher enforcement of fair-lending statutes, the funding of new subsidies to encourage businesses and nonprofit community development banks to enlarge their operations in depressed inner-city neighborhoods.

The common theme in all these ideas is channeling more private investment into the cities. More investment isn’t a silver bullet for neighborhoods besieged by economic and cultural decay. But, as the past few years show, it can produce tangible block-by-block progress.

Since Clinton took office, there’s been a significant increase in mortgage lending to African American and Latino borrowers. With federal regulators peering over their shoulders, major banks suddenly have become more enthusiastic about providing grass-roots nonprofit groups the loans they need to build low-income housing.

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In a recent interview, Clinton insisted that he wants to continue in this direction--tilting the government’s emphasis from “race-based” programs like affirmative action toward initiatives that target “economic need,” such as empowerment zones, support for community development banks and stiffened enforcement of the Community Reinvestment Act, the law meant to prevent commercial banks from denying credit to poor neighborhoods. “That’s where I think this whole thing needs to be going,” Clinton said.

If Clinton really means that, decisions rolling toward him in the next few weeks will give him two opportunities to prove it.

One will come in his choices to fill two vacancies on the Federal Reserve Board. The high drama at the Fed involves its decisions on interest rates and the money supply. But through its authority as the principal regulator for large bank holding companies, and the enforcement agency for several of the fair-lending laws, the Fed also looms over Clinton’s hopes of encouraging more bank lending in the cities.

“Looms” is the precise word. Last month, the Fed inflicted an embarrassing defeat on the administration, flatly rejecting pleas from the Justice and Treasury departments to broaden the fair-lending laws.

As always, the issue was--on the surface--arcane. In an effort to track discrimination, banks are now required to collect data on the race and gender of applicants for mortgage loans. The issue before the board was whether to allow banks to voluntarily collect such racial and gender data also on small-business, consumer and other loans.

As then-Associate Atty. Gen. John R. Schmidt noted in a letter to the board, obtaining that information would be a “useful step” toward determining whether minority-owned businesses face “unusually difficult barriers” to obtaining credit, as some studies suggest.

But with banking groups fearing the change would lead to mandatory collection, the Fed voted, 6 to 0, in late December not to allow banks to gather the information. All three of Clinton’s appointees to the board--including Chairman Alan Greenspan, whom the president reappointed--voted against the administration.

The Fed governors argued that Congress, not the board, should make such a decision. That argument is at best debatable. But what the vote made clear is that none of the Fed governors see themselves as champions of the urban investment agenda Clinton claims is one of his priorities.

His two upcoming nominations will give the president a chance to change that. Especially after the revelation that Clinton gave leading bankers extraordinary access to banking regulators at a private meeting with party fund-raisers last spring, community groups are intently watching to see whether he will install on the Fed an aggressive voice for the access-to-capital cause. “We hope we’ll have an advocate, not just a vote on these issues,” said Allen J. Fishbein, general counsel at the Center for Community Change in Washington.

Clinton’s second chance to advance his urban-investment agenda will come as Congress moves forward with sweeping legislation to restructure the financial industry. For years, market innovations, judicial rulings and regulatory decisions have eroded the legal walls that bar banks, securities firms and insurance companies from elbowing into each others’ businesses.

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Now, after years of stalemate between these powerful industries, Congress may be poised to break down the barriers entirely by repealing the Depression-era Glass-Steagall Act, which separates banking and commerce. Republican leaders in both chambers are preparing bills that would allow banks and other financial institutions and perhaps even commercial companies to all own each other. The administration hopes to unveil its own proposal--which is expected to be among the most sweeping in allowing cross-ownership--by March 1.

In the coming weeks, the debate over Glass-Steagall is likely to be dominated by self-interested skirmishing among banks and insurers and Wall Street. But the argument over financial modernization need not be strained solely through that narrow funnel. As many community groups argue, it could provide an opportunity for a much broader discussion--about the obligations of all financial institutions to provide capital for business and home ownership in neighborhoods where opportunity is crimped.

“When there’s going to be changes in powers . . . that’s the time to raise these issues,” said Robert L. Gnaizda, general counsel of the Greenlining Institute in San Francisco.

For Gnaizda and many like-minded advocates, the issue is whether the Community Reinvestment Act--the law requiring banks and thrifts to invest in all neighborhoods where they operate--should be extended to other financial institutions, like insurance companies, mortgage bankers and securities firms. The exemption of those players from the reinvestment law has steadily diluted its impact. Two decades ago, when the CRA was passed, banks and thrifts held nearly 60% of all financial assets; today, with the explosive growth of mutual and money market funds and other investment vehicles, the bank share is only about half that.

“I don’t think there is any question that CRA will be functionally obsolete if we don’t find some way of modernizing it to keep pace with the modernization of the financial industry,” said Mark A. Pinsky, executive director of the National Assn. of Community Development Loan Funds.

As Pinsky freely acknowledges, the prospect of expanding the CRA raises many unanswered questions. The community-lending requirement on banks was sold as a quid pro quo for federal deposit insurance. Although Pinsky points out that these other industries receive different federal subsidies (and indirectly benefit from the federal safety net beneath the banking industry), even he admits that these benefits are “not as clear” as the insurance for banks. Nor is it entirely clear what form of investment, say, a mutual fund, might make to support an inner-city neighborhood.

But these hurdles are not insurmountable. Congress does not have to determine that non-banks receive federal benefits equal to a bank before forcing them to meet community-lending requirements. An agreement the Greenlining Institute reached last fall with Merrill Lynch & Co. to push $77 million into low-income Southern California neighborhoods (through, among other things, increasing its mortgage and small business activities) could provide a model for the form of investment; or, as Pinsky suggests, securities and insurance firms might contribute to a fund to capitalize local community development banks.

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None of this is likely to happen any time soon. Especially with Republicans controlling Congress, it would take years of lobbying and advocacy to build the case for expanding the CRA. But the conversation has to begin somewhere. And with banks, securities firms and insurance companies all now eager for the administration’s blessing on legislation to raze the walls between them, this may be as good a chance as the president ever gets to start it.

Ronald Brownstein’s column appears in this space each Monday.